Indicate
by check mark whether the registrant (l) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
at least the past 90 days. Yes xNo o

Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes oNo o

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.

Large
accelerated filer o

Accelerated
filer o

Non-accelerated
filer o

Smaller
reporting company x

(Do not check if
a smaller reporting company)

Indicate
by check mark whether the registrant is a shell company filer (as defined in
Rule 12b-2 of the Exchange Act). Yes oNo x

At July 29, 2009,
9,473,572 shares of Registrants Common Stock, $0.0001 par value were
outstanding.

LOGICVISION, INC.

FORM 10-Q

QUARTERLY PERIOD ENDED JUNE 30,
2009

INDEX

Page

Part I:

Financial Information

2

Item 1:

Financial Statements

2

Unaudited Condensed Consolidated Balance Sheets at June 30, 2009,
and December 31, 2008

2

Unaudited Condensed Consolidated Statements of Operations for the
Three and Six Months Ended

June 30, 2009 and 2008

3

Unaudited Condensed Consolidated Statements of Cash Flows for the
Six Months Ended

June 30,
2009 and 2008

4

Notes to Unaudited Condensed Consolidated Financial
Statements

5

Item 2:

Managements Discussion and Analysis of Financial
Condition and Results of Operations

Adjustments to reconcile net loss to net cash used
in operating activities:

Depreciation and amortization

121

197

Provision for (recovery of) doubtful
accounts

8

(8

)

Stock-based compensation

234

293

Changes in operating assets and
liabilities:

Accounts receivable

(803

)

(178

)

Prepaid expenses and other current assets

(300

)

338

Other long-term assets

5

5

Accounts payable

383

78

Accrued and other liabilities

(517

)

(392

)

Deferred revenue

(1,787

)

119

Net cash used in operating activities

(3,022

)

(1,811

)

Cash flows from investing activities:

Purchase of investments

-

(1,407

)

Purchase of property and equipment

(1

)

(150

)

Proceeds from sales and maturities of investments

150

1,525

Net cash provided by (used in) investing
activities

149

(32

)

Cash flows from financing activities:

Proceeds from issuance of common stock

15

19

Payments made on capital lease

(23

)

(19

)

Repurchase of common stock

-

(175

)

Net cash used in financing activities

(8

)

(175

)

Effect of exchange rate on cash and cash equivalents

(10

)

(21

)

Net decrease in cash and cash equivalents

(2,891

)

(2,039

)

Cash and cash
equivalents, beginning of period

9,249

6,783

Cash and cash equivalents, end of period

$

6,358

$

4,744

The accompanying notes are an integral
part of these unaudited condensed consolidated financial
statements.

4

LOGICVISION, INC.

NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The
accompanying unaudited condensed consolidated financial statements include the
accounts of LogicVision, Inc. (we, our, LogicVision or the Company) and
its wholly-owned subsidiaries. All intercompany accounts and transactions have
been eliminated in consolidation. The Companys fiscal year end is December 31.

The
accompanying unaudited condensed consolidated financial statements have been
prepared by the Company in accordance with the rules and regulations of the
Securities and Exchange Commission (SEC). Certain information and footnote
disclosures normally included in consolidated financial statements prepared in
accordance with generally accepted accounting principles in the United States of
America (GAAP) have been condensed or omitted in accordance with such rules
and regulations. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments, consisting
only of normal recurring adjustments, necessary to state fairly the financial
position of the Company and its results of operations and cash flows. The
unaudited condensed consolidated interim financial statements contained herein
should be read in conjunction with the audited financial statements and
footnotes for the year ended December 31, 2008 included in the Companys Annual
Report on Form 10-K as filed with the SEC.

The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenue and expenses during the reported period. Actual results could differ
from those estimates.

We have
incurred substantial losses and negative cash flows from operations since
inception. For the year ended December 31, 2008, we incurred a net loss of
approximately $3.5 million and positive cash flows from operations of
approximately $1.6 million. As of June 30, 2009, we had an accumulated deficit
of approximately $103.7 million. While management believes that our current
funds will be sufficient to enable us to meet our planned expenditures through
at least December 31, 2009, we are subject to risks associated with companies of
similar size and stage of development, including but not limited to, dependence
on key individuals, competition from substitute services and larger companies,
and the continued successful development and marketing of our products and
services. If anticipated operating results are not achieved, management has the
intent and believes it has the ability to delay or reduce expenditures so as not
to require additional financing resources. Failure to generate sufficient cash
flows from operations, raise additional capital or reduce certain discretionary
spending could have a material adverse effect on the Company's ability to
achieve its intended business objectives.

Reclassifications

Certain
amounts in the prior year financial statements have been reclassified to conform
to the current year presentation. Specifically, we have reclassified certain
prior year amounts relating to the classification of revenues to show revenues
from bundled time-based licenses and maintenance revenues together. We believe
that the revised presentation is a better way to reflect our revenue stream. The
effects of these reclassifications had no impact on previously reported total
revenues, gross profit or net income.

Stock-based compensation expense for the six months ended June 30, 2008
includes compensation expense recognized as a result of the consummation of the
Companys stock option exchange offer on March 8, 2007, in accordance with SFAS
123(R); compensation cost associated with the incremental fair value of these
option awards was calculated at approximately $579,000 using the Black-Scholes
valuation option pricing model. To this total was added the remaining
unamortized fair value of any exchanged options originally granted of $21,000 to
arrive at a total fair value of $600,000 to be amortized to expense over the
vesting period of these newly exchanged options. Of this amount, $548,000 was
recognized as compensation expense for the year ended December 31, 2007. The
remaining amount was fully recognized as compensation expense for the quarter
ended March 31, 2008.

Compensation expense for all share-based payment awards is recognized
using the multiple option approach. As stock-based compensation expense
recognized in the consolidated statements of operations for the six months ended
June 30, 2009 and 2008, is based on awards ultimately expected to vest, it has
been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.

The
Companys determination of fair value of share-based payment awards on the date
of grant using the Black-Scholes option-pricing model is affected by the
Companys stock price as well as assumptions regarding a number of complex and
subjective variables. These variables include, but are not limited to, the
Companys expected stock price volatility over the term of the awards, and
actual and projected employee stock option exercise behaviors. Expected
volatilities are based on the historical volatility of the Companys common
stock. The expected term of the options granted represents the period of time
that options are expected to be outstanding, based on historical information.
The Company uses historical data to estimate option exercise and employee
terminations. The risk-free interest rate is based on the U.S. Treasury
zero-coupon issues with remaining terms similar to the expected term of the
Companys equity awards. The Company does not anticipate paying any cash
dividends in the foreseeable future and therefore used an expected dividend
yield of zero.

There were no stock options granted
during the quarter ended June 30, 2009.

Net Loss Per Share

SFAS 128,
Earnings Per Share, requires a dual presentation of basic and diluted earnings
per share (EPS). Basic EPS excludes dilution and is computed by dividing net
income or loss by the weighted average number of shares of common stock
outstanding during the period. Diluted EPS reflects the potential dilution that
would occur if outstanding securities to issue common stock were exercised or
converted to common stock. Diluted net loss per share for the three and six
months ended June 30, 2009 and 2008 does not differ from basic net loss per
share since potential shares of common stock issuable upon exercise of stock
options and warrants are anti-dilutive under the treasury stock
method.

The
following table presents the calculation of the basic and diluted net loss per
share (in thousands, except per share amounts):

Three Months Ended

Six Months Ended

June 30,

June 30,

2009

2008

2009

2008

Numerator - Basic and Diluted

Net loss

$

(262

)

$

(997

)

$

(366

)

$

(2,263

)

Denominator - Basic and Diluted

Weighted average
common stock outstanding

9,474

9,600

9,471

9,637

Basic and Diluted net loss per share

$

(0.03

)

$

(0.10

)

$

(0.04

)

$

(0.23

)

6

Options
and warrants to purchase an aggregate of 2.4 million shares of common stock
outstanding at June 30, 2009 and 2.3 million shares at June 30, 2008 were
excluded from the computation of diluted shares because of their antidilutive
effect on net loss per share for the three and six months then ended.

Recently Issued Accounting Standards

In May
2009 the FASB issued and we adopted SFAS No. 165, Subsequent Events, or SFAS 165. SFAS
165 establishes general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. SFAS 165 requires the disclosure of the
date through which an entity has evaluated subsequent events and the basis for
that date, that is, whether the date represents the date the financial
statements were issued or were available to be issued. SFAS 165 is effective in
the first interim period ending after June 15, 2009.

In June
2009 the FASB issued SFAS No. 167, Amendments
to FASB Interpretation No. 46(R), or SFAS
167, that will change how we determine when an entity that is insufficiently
capitalized or is not controlled through voting (or similar rights) should be
consolidated. Under SFAS No. 167, determining whether a company is required to
consolidate an entity will be based on, among other things, an entitys purpose
and design and a companys ability to direct the activities of the entity that
most significantly impact the entitys economic performance. SFAS 167 is
effective for financial statements after January 1, 2010.

In June
2009 the FASB issued SFAS No. 168, The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting, or SFAS 168. SFAS 168 represents
the last numbered standard to be issued by FASB under the old (pre-Codification)
numbering system, and amends the GAAP hierarchy established under SFAS 162. On
July 1, 2009 the FASB launched FASBs new Codification entitled The FASB Accounting Standards Codification. The Codification will supersede all existing non-SEC
accounting and reporting standards. SFAS 168 is effective in the first interim
and annual periods ending after September 15, 2009. This pronouncement will have
no effect on our unaudited condensed consolidated financial statements upon
adoption other than references to GAAP will be changed.

Note 2. Cash and Cash Equivalents
and Investments

The
Company considers all highly liquid investment instruments purchased with
original maturities of three months or less at the acquisition date to be cash
equivalents. Investment instruments purchased with original maturities of more
than three months, which mature in less than twelve months, are considered to be
short-term investments. All investments are classified as available-for-sale and
are reported at fair value. Interest and realized gains and losses are included
in interest and other income, net. Realized gains and losses are recognized
based on the specific identification method.

Cash, cash equivalents and
investments consist of the following (in thousands):

June 30,

December 31,

2009

2008

Cash and cash equivalents:

Cash

$

427

$

647

Money market funds

5,931

8,452

U.S. government agency notes

-

150

Total cash and cash equivalents

$

6,358

$

9,249

Short-term investments:

U.S. government agency notes

-

$

150

Total short-term investments

$

-

$

150

7

Note 3. Goodwill

The
Company evaluates goodwill at least on an annual basis (in the fourth quarter)
and whenever events and changes in circumstances suggest that the carrying
amount may not be recoverable from its estimated future cash flow. No assurances
can be given that future evaluations of goodwill will not result in charges as a
result of future impairment.

Note 4. Loan Agreement

As of
June 30, 2009, we had a loan agreement with a bank under which we may borrow, on
a revolving basis, up to $2.0 million. The interest rate applicable to any
outstanding amounts is determined by reference to LIBOR plus a stated margin,
and is subject to daily adjustment. In connection with entering into the
agreement, we granted the bank a security interest in all of our existing and
after-acquired property, including, but not limited to, intellectual property,
inventory and equipment. Under the agreement, we must comply with certain
operating and reporting covenants as a condition to receiving credit extensions.
If we fail to perform any of our obligations, violate any of our covenants,
suffer a material adverse change in our business or financial condition or
become insolvent under the agreement, the bank can declare any outstanding
amounts immediately due and payable and cease advancing us money or extending us
credit. The agreement expires on February 24, 2010. We are currently in
compliance with all the operating and reporting covenants under the agreement
and there are currently no borrowings outstanding.

Note 5. Income Taxes

Effective
January 1, 2007, the Company adopted the provisions of Financial Accounting
Standards Board Interpretation No. 48 (FIN No. 48), Accounting for
Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109,
which provisions included a two-step approach to recognizing, de-recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS 109
Accounting for Income Taxes (SFAS 109). As a result of the implementation of
FIN No. 48, the Company recognized an increase of approximately $0.6 million in
the liability for unrecognized tax benefits and a decrease in the related
reserve of the same amount. Therefore upon implementation of FIN No. 48, the
Company recognized no material adjustment to the January 1, 2007 balance of
retained earnings.

Our
continuing practice is to recognize interest and/or penalties related to income
tax matters in income tax expense. As of June 30, 2009, the Company had no
accrued interest and penalties related to uncertain tax matters.

By the
end of 2009, the Company expects to have no uncertain tax positions that would
be reduced as a result of a lapse of the applicable statute of limitations. We
do not anticipate the adjustments would result in a material change to our
financial position.

We file
income tax returns in the U.S. federal jurisdictions, and various states and
foreign jurisdictions. The 1991 through 2008 tax years are open and may be
subject to potential examination in one or more jurisdictions. The Company is
not currently under federal, state or foreign income tax examination.

8

Note 6. Commitments and
Contingencies

Contractual
Obligations

The Company and its subsidiaries in the U.S. and Canada rent office facilities
under noncancelable operating leases which expire through July 2011. The Company
and its subsidiaries are responsible for certain maintenance costs, taxes and
insurance under the respective leases. Total future minimum payments under such
operating leases, including estimated operating costs, and payments due under a
capital lease and a software purchase commitment at June 30, 2009 were as
follows (in thousands):

Operating

Purchase

Year ending
December 31,

Leases

Capital Lease

Obligations

Total

2009

383

24

163

570

2010

305

66

650

1,021

2011

70

-

650

720

$

758

$

90

$

1,463

$

2,311

Off-balance Sheet
Arrangements

The Companys off-balance sheet
arrangements consist solely of operating leases as described above.

Indemnification
Obligations

The
Company enters into standard license agreements in the ordinary course of
business. Pursuant to these agreements, the Company agrees to indemnify its
customers for losses suffered or incurred by them as a result of any patent,
copyright, or other intellectual property infringement claim by any third party
with respect to the Companys products. These indemnification obligations have
perpetual terms. The Companys normal business practice is to limit the maximum
amount of indemnification to the amount received from the customer. On occasion,
the maximum amount of indemnification the Company may be required to make may
exceed its normal business practices. The Company estimates the fair value of
its indemnification obligations as insignificant, based upon its historical
experience concerning product and patent infringement claims. Accordingly, the
Company had no liabilities recorded for indemnification under these agreements
as of June 30, 2009.

The
Company has agreements whereby its officers and directors are indemnified for
certain events or occurrences while the officer or director is, or was, serving
at the Companys request in such capacity. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited; however, the Company has a directors
and officers insurance policy that reduces its exposure and enables the Company
to recover a portion of future amounts paid. As a result of the Companys
insurance policy coverage, the Company believes the estimated fair value of
these indemnification agreements is minimal. Accordingly, no liabilities have
been recorded for these agreements as of June 30, 2009.

Warranties

The
Company offers its customers a warranty that its products will conform to the
documentation provided with the products. To date, there have been no payments
or material costs incurred related to fulfilling these warranty obligations.
Accordingly, the Company has no liabilities recorded for these warranties as of
June 30, 2009. The Company assesses the need for a warranty reserve on a
quarterly basis, and there can be no guarantee that a warranty reserve will not
become necessary in the future.

Note 7. Concentration of Revenues
and Credit Risks

The
Company has been dependent on a relatively small number of customers for a
substantial portion of its revenue, although the customers comprising this group
have changed from time to time. Customers accounting for more than 10 percent of
revenue for the periods indicated below are as follows:

Three Months Ended June
30,

Six Months Ended June 30,

2009

2008

2009

2008

Broadcom Corporation

28%

18%

26%

19%

LSI
Corporation

16%

17%

16%

17%

NEC Corporation

14%

17%

14%

16%

At June
30, 2009, three customers accounted for 20%, 20% and 11% of net accounts
receivable, respectively. At December 31, 2008, four customers accounted for
approximately 34%, 25%, 10% and 10% of net accounts receivable, respectively.

9

Revenue
from NEC has been derived from two distributors in the 2008 and 2009 quarterly
periods. Prior to the three months ended June 30, 2009, revenue from NEC from
each distributor did not constitute more than 10% of revenue. For the three
months ended June 30, 2009, one of the distributors revenue from NEC accounted
for more than 10% of the Companys revenue, and accordingly, the combined
revenue from distributors that has been derived from NEC has been reported in
the table above.

Note 8. Comprehensive
Loss

Comprehensive loss is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. SFAS 130, Reporting Comprehensive Income, requires
companies to classify items of other comprehensive income by their nature in the
financial statements and display the accumulated balance of other comprehensive
income separately from retained earnings and additional paid-in capital in the
stockholders equity section of the balance sheet.

The
Companys other comprehensive income (loss) consists primarily of adjustments to
translate the financial statements of the Companys foreign subsidiaries into
U.S. dollars upon consolidation, and unrealized gains (losses) on
available-for-sale investments. The functional currency of the Companys foreign
subsidiaries is the local currency and therefore, the translation adjustments of
those statements into U.S. dollars are recorded in accumulated other
comprehensive income (loss), which is reported as a separate component of
stockholders equity.

For the
three and six months ended June 30, 2009 and 2008, comprehensive loss, which was
comprised of the Companys net loss for the periods and changes in foreign
currency translation adjustments and unrealized gains (losses) on investments
were as follows (in thousands):

Three Months Ended

Six Months Ended

June 30,

June 30,

2009

2008

2009

2008

Net loss

$

(262

)

$

(997

)

$

(366

)

$

(2,263

)

Other comprehensive income (loss) -

Cumulative translation adjustment

-

(19

)

(8

)

(31

)

Unrealized gain (loss) on

available-for-sale investments, net

-

(6

)

-

-

Comprehensive
loss

$

(262

)

$

(1,022

)

$

(374

)

$

(2,294

)

Note 9.
Segment Reporting

The
Company has adopted SFAS 131, Disclosure about Segments of an Enterprise and
Related Information. Although the Company offers various design and
manufacturing embedded test software products and services to its customers, the
Company does not manage its operations by these products and services, but
instead views the Company as one operating segment when making business
decisions. The Company does not manage its operations on a geographical basis.
Revenues attributed to the United States and to all foreign countries are based
on the geographical location of the customers. The Company uses one measurement
of profitability for its business.

10

The table below sets forth revenues
by product line (in thousands):

Three Months Ended

Six Months Ended

June 30,

June 30,

2009

2008

2009

2008

ETCreate

$

2,268

$

2,227

$

4,575

$

4,588

Silicon
Insight

444

508

918

962

Others

273

292

556

447

Total revenues

$

2,985

$

3,027

$

6,049

$

5,997

The following is a summary of the
Companys revenues by geographic operations (in thousands):

Three Months Ended

Six Months Ended

June 30,

June 30,

2009

2008

2009

2008

United States

$

2,149

$

2,191

$

4,366

$

4,324

Japan

498

524

945

1,073

Others

338

312

738

600

$

2,985

$

3,027

$

6,049

$

5,997

The following is a summary of the
Companys long-lived assets (in thousands):

June 30,

December 31,

2009

2008

United States

$

237

$

323

Canada

55

85

Japan

2

3

$

294

$

411

Note 10. Proposed Merger

On May 6,
2009, the Company entered into an Agreement and Plan of Merger (the Merger
Agreement) with Mentor Graphics Corporation, an Oregon corporation (Mentor
Graphics), and Fulcrum Acquisition Corporation, a wholly-owned subsidiary of
Mentor Graphics (Merger Sub). Under the terms of the Merger Agreement, if
applicable conditions are met, Merger Sub will merge with and into the Company,
and the Company will survive as a wholly-owned subsidiary of Mentor Graphics
(the Merger). The Merger Agreement has been approved by the Boards of
Directors of each of the Company and Mentor Graphics, and is subject to the
approval of the Companys stockholders. If the Merger is completed, each
outstanding share of the Companys common stock will be converted into the right
to receive 0.2006 shares of Mentor Graphics common stock (the Exchange Ratio).
Outstanding options to purchase the Companys common stock will be assumed by
Mentor Graphics and converted upon completion of the Merger into stock options
with respect to Mentor Graphics common stock, after giving effect to the
Exchange Ratio (or, in Mentor Graphics discretion, Mentor Graphics will grant
equivalent options under one of its equity plans in substitution of such options
to purchase the Companys common stock, after giving effect to the Exchange
Ratio). Outstanding warrants to purchase the Companys common stock will
automatically terminate upon the Merger in accordance with their terms and will
be converted into the right to receive a number of shares of Mentor Graphics
common stock, if any, based on the Exchange Ratio. The Merger Agreement contains
termination rights for both the Company and Mentor Graphics. Upon termination of
the Merger Agreement under specified circumstances, the Company may be required
to pay to Mentor Graphics a termination fee of $538,193 plus, subject to a cap
of $403,645, the aggregate amount of reasonable and documented out-of-pocket
expenses incurred by Mentor Graphics.

11

The LogicVision stockholders meeting is currently scheduled for August 18, 2009.
During the three months and six months ended June 30, 2009, we recorded
merger-related costs of $475,000 and $718,000, respectively.

Note 11. Subsequent
Events

In
accordance with SFAS 165, we have evaluated subsequent events through July 30,
2009, the date of issuance of the unaudited condensed consolidated financial
statements. During this period we did not have any material recognizable
subsequent events.

12

ITEM 2:MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This
Managements Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the unaudited condensed
consolidated financial statements and notes thereto set forth in Item 1 of this
report and the section entitled Managements Discussion and Analysis of
Financial Condition and Results of Operations in the Companys Annual Report on
Form 10-K for the year ended December 31, 2008.

When
used in this Report, the words expects, anticipates, intends, estimates,
plans, believes, and similar expressions are intended to identify
forward-looking statements. These are statements that relate to future periods
and include statements about the features, benefits and performance of our
current and future products, services and technology, plans for future products
and services and for enhancements of existing products and services, our
expectations regarding future operating results, including backlog, revenues,
sources of revenues and expenses, net losses, fluctuations in future operating
results, our estimates regarding the adequacy of our capital resources, our
capital requirements and our needs for additional financing, planned capital
expenditures, use of our working capital, our critical accounting policies and
estimates, our internal control over financial reporting, our patent
applications and licensed technology, our efforts to protect intellectual
property, expectations regarding dividends, our ability to attract customers,
establish license agreements and obtain orders, the impact of economic and
industry conditions on our customers, customer demand, our growth strategy, our
marketing efforts, our business development efforts, future acquisitions or
investments, our focus on larger orders with major customers, our employee
matters, our competitive position, our foreign currency risk strategy, and the
impact of recent accounting pronouncements. Forward-looking statements are
subject to risks and uncertainties that could cause actual results to differ
materially from those projected. These risks and uncertainties include, but are
not limited to, the possibility that orders could be modified, cancelled or not
renewed, our ability to negotiate and obtain customer agreements and orders,
lengthening sales cycles, the concentration of sales to large customers and our
reliance on a limited number of customers for a substantial portion of revenues,
dependence upon and trends in capital spending budgets in the semiconductor
industry and fluctuations in general economic conditions, our ability to rapidly
develop new technology and introduce new products, our ability to safeguard our
intellectual property and the risks set forth below under Part II, Item 1A,
Risk Factors. These forward-looking statements speak only as of the date
hereof. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Companys expectations with regard thereto
or any change in events, conditions or circumstances on which any such statement
is based.

In
this report, all references to LogicVision, we, us, our or the Company
mean LogicVision, Inc. and its subsidiaries, except where it is made clear that
the term means only the parent company.

LogicVision and the LogicVision logo are our registered trademarks. We
also refer to trademarks of other corporations and organizations in this
document.

Merger Agreement with Mentor
Graphics

On May 6,
2009, we entered into a merger agreement with Mentor Graphics Corporation
pursuant to which Mentor Graphics has agreed to acquire us subject to the terms
and conditions set forth in the merger agreement. The merger agreement was
unanimously approved by the boards of directors of both LogicVision and Mentor
Graphics.

At the
effective time of the proposed merger, each issued and outstanding share of
LogicVision common stock will be converted into the right to receive 0.2006
shares of Mentor Graphics common stock. The closing of the proposed merger is
subject to the approval of LogicVisions stockholders and other customary
closing conditions. The LogicVision stockholders meeting to, among other things,
approve the merger is currently scheduled for August 18, 2009.

13

Critical Accounting Policies and
Estimates

LogicVisions financial statements and accompanying notes are prepared in
accordance with accounting principles generally accepted in the United States
(GAAP). Preparing financial statements requires management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. These estimates and
assumptions are affected by managements application of accounting policies.
Critical accounting policies for LogicVision include revenue recognition,
allowance for doubtful accounts, valuation of investments, inventory, goodwill
impairment, valuation of long-lived intangible assets, accounting for
stock-based compensation, and accounting for income taxes, which are discussed
in more detail under the caption Critical Accounting Policies and Estimates in
the Companys Annual Report on Form 10-K for the year ended December 31, 2008.

Stock-Based Compensation
Expense

Stock-based compensation expense recognized under SFAS 123(R) for the six
months ended June 30, 2009 and 2008 was $234,000 and $293,000, respectively,
which consisted of stock-based compensation expense related to employee stock
options and the employee stock purchase plan.

Stock-based compensation expense for the six months ended June 30, 2008
includes compensation expense recognized as a result of the consummation of the
Companys stock option exchange offer on March 8, 2007, in accordance with SFAS
123(R); compensation cost associated with the incremental fair value of these
option awards was calculated at approximately $579,000 using the Black-Scholes
valuation option pricing model. To this total was added the remaining
unamortized fair value of any exchanged options originally granted of $21,000 to
arrive at a total fair value of $600,000 to be amortized to expense over the
vesting period of these newly exchanged options. Of this amount, $548,000 was
recognized as compensation expense for the year ended December 31, 2007. The
remaining amount was fully recognized as compensation expense for the quarter
ended March 31, 2008.

Compensation expense for all share-based payment awards is recognized
using the multiple-option approach. As stock-based compensation expense
recognized in the consolidated statements of operations for the six months ended
June 30, 2009 and 2008 is based on awards ultimately expected to vest, it has
been reduced for estimated forfeitures. SFAS 123(R) requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.

The
Companys determination of fair value of share-based payment awards on the date
of grant using the Black-Scholes option-pricing model is affected by the
Companys stock price as well as assumptions regarding a number of complex and
subjective variables. These variables include, but are not limited to, the
Companys expected stock price volatility over the term of the awards, and
actual and projected employee stock option exercise behaviors. Expected
volatilities are based on the historical volatility of the Companys common
stock. The Company uses historical data to estimate option exercise and employee
terminations. The expected term of the options granted represents the period of
time that options are expected to be outstanding, based on historical
information. The risk-free interest rate is based on the U.S. Treasury
zero-coupon issues with remaining terms similar to the expected term of the
Companys equity awards. The Company does not anticipate paying any cash
dividends in the foreseeable future and therefore used an expected dividend
yield of zero.

Results of Operations

Orders and backlog

We
received new orders of $1.2 million in the second quarter of 2009, compared to
$2.6 million in the first quarter of 2009 and $7.1 million in the second quarter
of 2008. These new orders are for periods ranging from one to three years.
Receipt of new orders may fluctuate due to the lengthy sales cycles and our
dependence on relatively few customers for large orders.

Our
one-year backlog was $10.9 million at June 30, 2009, compared with $9.9 million
at December 31, 2008 and $10.5 million at June 30, 2008. Backlog is comprised of
deferred revenues (orders which have been billed but for which revenue has not
yet been recognized) plus orders which have been accepted but have not yet been
billed and for which no revenue has been recognized. A portion of the orders
which have been accepted but have not yet been billed provide customers with
cancellation rights; customers may also renew contracts before their expiration
or modify that portion of their orders which is cancelable. Therefore, our
backlog at any particular date is not necessarily indicative of revenues to be
recognized during any succeeding period.

14

Revenues, cost of revenues
and gross profit

The table below sets forth the fluctuations
in revenues, cost of revenues and gross profit data for the three and six months
ended June 30, 2009 and 2008 (in thousands, except percentage data):

Three Months Ended

Six Months Ended

June 30,

%

June 30,

%

2009

2008

Change

2009

2008

Change

Revenues:

Bundled license and maintenance

$

2,712

$

2,766

-2%

$

5,432

$

5,581

-3%

Upfront license

-

-

-

61

-

100%

Professional service

273

261

5%

556

416

34%

Total revenues

2,985

3,027

-1%

6,049

5,997

1%

Cost of
revenues:

Bundled license and maintenance

410

720

-43%

878

1,474

-40%

Professional service

142

108

31%

278

185

50%

Total cost of revenues

552

828

-33%

1,156

1,659

-30%

Gross
profit

$

2,433

$

2,199

11%

$

4,893

$

4,338

13%

Percentage of total revenues:

Revenues:

Bundled license and maintenance

91%

91%

90%

93%

Upfront license

0%

0%

1%

0%

Professional service

9%

9%

9%

7%

Total revenues

100%

100%

100%

100%

Cost
of revenues:

Bundled license and maintenance

14%

24%

15%

25%

Professional service

5%

4%

5%

3%

Total cost of revenues

19%

28%

20%

28%

Gross profit

82%

73%

81%

72%

The
majority of our revenues are generated from time-based licenses, which are
bundled to include maintenance services for the duration of their terms. We
typically recognize the license and maintenance revenue ratably during the
maintenance period. We believe the revised presentation is a better way to
reflect our revenue stream. The professional service revenue is derived
primarily from consulting and training services we provide to customers.
Occasionally we sell a term-based or perpetual license to a customer for which
we can carve out the fair value of any undelivered elements which results in
upfront license revenue.

Total
revenues remained consistent for the three
and six months ended June 30, 2009 compared to the same period in fiscal 2008.
Professional service revenue increased primarily due to an increase in
consulting services provided to customers.

Total
cost of revenues decreased in the three
months ended June 30, 2009 compared to the same period in fiscal 2008 primarily
due to decreased post-sales support by our application engineering group as well
as a software license that had reached the end of its useful life by December
31, 2008. Cost of professional service increased primarily due to an increase in
time spent on services provided to customers.

15

Revenues by product line and
country

The table
below sets forth the fluctuations in revenues by product line and geographic
region for the three and six months ended June 30, 2009 and 2008 (in thousands,
except percentage data):

Revenue by product
line:

Three Months Ended

Six Months Ended

June 30,

%

June 30,

%

2009

2008

Change

2009

2008

Change

ETCreate

$

2,268

$

2,227

2%

$

4,575

$

4,588

0%

Silicon
Insight

444

508

-13%

918

962

-5%

Others

273

292

-7%

556

447

24%

Total revenues

$

2,985

$

3,027

-1%

$

6,049

$

5,997

1%

Revenue by geographic region:

Three Months Ended

Six Months Ended

June 30,

%

June 30,

%

2009

2008

Change

2009

2008

Change

United States

$

2,149

$

2,191

-2%

$

4,366

$

4,324

1%

Japan

498

524

-5%

945

1,073

-12%

Others

338

312

8%

738

600

23%

$

2,985

$

3,027

-1%

$

6,049

5,997

1%

Product line:

ETCreate consists of embedded test
intellectual property and corresponding design automation software that provides
embedded test solutions for different components of an application-specific
integrated circuit or system-on-chip design. ETCreate revenues remained
consistent for the three and six months ended June 30, 2009 compared to the same
period in fiscal 2008.

Silicon Insight consists of hardware
and software products for use with third party test platforms. Silicon Insight
enables faster time-to-market and lower test costs through the support of
interactive or test program controlled at-speed testing, datalogging, and debug
of silicon designed with LogicVisions embedded test IP. Silicon Insight
revenues decreased for the three and six months ended June 30, 2009 compared to
the same period in fiscal 2008, primarily due to fewer orders received from
customers.

Others includes revenues from
consulting and training activities. Consulting revenue decreased for the three
months ended June 30, 2009 compared to the same period in fiscal 2008 due to a
decrease in consulting services provided to customers. Consulting revenue
increased for the six months ended June 30, 2009 compared to the same period in
fiscal 2008 due to an increase in on-site consulting services to customers.

Geographic region:

Revenue
in the United States remained consistent for the three and six months ended June
30, 2009 compared to the same period in fiscal 2008. Revenue in Japan decreased
in the three and six months ended June 30, 2009 compared to the same period in
fiscal 2008 primarily due to decreased orders in the past six months.

16

Operating Expenses:

The table
below sets forth operating expense data for the three and six months ended June
30, 2009 and 2008 (in thousands, except percentage data):

Three Months Ended

Six Months Ended

June 30,

%

June 30,

%

2009

2008

Change

2009

2008

Change

Operating expenses:

Research and development

$

914

$

801

14%

$

1,715

$

1,809

-5%

Sales and marketing

758

1,540

-51%

1,601

3,046

-47%

General and administrative

556

915

-39%

1,243

1,809

-31%

Cost related to Mentor Graphics

acquisition

475

-

100%

718

-

100%

Total operating expenses

$

2,703

$

3,256

-17%

$

5,277

$

6,664

-21%

Percentage of total revenues:

Operating expenses:

Research and development

31%

26%

28%

30%

Sales and marketing

25%

51%

26%

51%

General and administrative

19%

30%

21%

30%

Cost related to Mentor Graphics

acquisition

16%

-

12%

0%

Total operating expenses

91%

107%

87%

111%

Research and development expenses
increased in the three months ended June 30, 2009 compared to the same period in
fiscal 2008, primarily due to a Canadian research and development credit
received during the three months ended June 30, 2008 that we have not received
in the current quarter of 2009. The expenses decreased in the six months ended
June 30, 2009 compared to the same period in fiscal 2008, primarily due to lower
compensation and facility expenses resulting from our cost reduction efforts.

Sales
and marketing expenses decreased in the three
and six months ended June 30, 2009 compared to the same period in fiscal 2008,
primarily due to lower compensation expenses resulting from a reduction in
headcount and lower commission expenses resulting from lower
bookings.

General and administrative expenses
decreased in the three and six months ended June 30, 2009, compared to the same
period in fiscal 2008, primarily due to lower compensation and facility expenses
resulting from our cost reduction efforts.

Cost
related to Mentor Graphics acquisition comprised primarily of the legal, accounting and advisory expenses
related to the merger agreement entered into with Mentor Graphics Corporation
publicly announced in May 2009.

17

Other Items:

The table
below sets forth other data for the three and six months ended June 30, 2009 and
2008 (in thousands, except percentage data):

Three Months Ended

Six Months Ended

June 30,

%

June 30,

%

2009

2008

Change

2009

2008

Change

Interest and other income, net

$

8

$

58

-86%

$

18

$

76

-76%

Income tax provision (benefit)

$

-

$

(2

)

NM

$

-

$

13

NM

Percentage of total revenues:

Interest and other income, net

-

2%

-

1%

Income tax provision (benefit)

-

-

-

-

Interest and other income, net
decreased in the three and six months ended June 30, 2009 compared to the same
period in fiscal 2008, primarily due to lower interest rates earned on our
investments and cash and cash equivalents as a result of lower market interest
rates.

Income
tax provision Our net operating losses are
generated domestically, and amounts attributed to our foreign operations have
been insignificant for all periods presented. Our income tax provisions are
primarily related to state and foreign taxes. No benefit for income taxes has
been recorded due to the uncertainty of the realization of deferred tax assets.
From inception through December 31, 2008, we incurred net losses for federal and
state tax purposes. As of December 31, 2008, we had federal and California net
operating loss carryforwards of approximately $93.1 million and $33.8 million
available to reduce future federal and California taxable income, respectively.
These federal and California carryforwards will begin to expire in 2009 if not
utilized. The extent to which these carryforwards can be used to offset future
taxable income may be limited under Section 382 of the Internal Revenue Code and
applicable state tax law.

Liquidity and Capital Resources

At June 30, 2009, we had cash and
cash equivalents of $6.4 million and negative working capital of $815,000.

Net cash
used in operating activities was $3.0 million and $1.8 million in the first six
months of 2009 and 2008, respectively. Net cash used in operating activities for
the six months ended June 30, 2009 was primarily due to a net loss of $0.4
million, decreases in deferred revenue of $1.8 million, accrued liabilities of
$0.5 million, increases in accounts receivable of $0.8 million and prepaid
expenses and other current assets of $0.3 million; partially offset by non-cash
charges from stock-based compensation and depreciation and amortization of $0.4
million, and an increase of accounts payable of $0.4 million. Net cash used in
operating activities for the six months ended June 30, 2008 was primarily due to
a net loss of $2.3 million, and a decrease in accrued liabilities of $0.4
million; partially offset by non-cash charges from stock-based compensation and
depreciation and amortization of $0.5 million, a decrease in prepaid expenses
and other current assets of $0.3 million, and an increase in deferred revenue of
$0.1 million.

Net cash
provided by investing activities was $149,000 in the first six months of 2009,
and net cash used in investing activates was $32,000 in the first six months of
2008. Net cash provided by investing activities in the first six months of 2009
was primarily due to proceeds from maturities of marketable securities of
$150,000. Net cash used in investing activities in the first six months of 2008
was primarily due to the purchase of marketable securities of $1.4 million and
fixed assets of $150,000, partially offset by the proceeds from maturities of
marketable securities of $1.5 million.

18

Net cash
used in financing activities was $8,000 and $175,000 in the first six months of
2009 and 2008, respectively. Net cash used in finance activities in the first
six months of 2009 was primarily due to the payments made on our capital lease,
partially offset by the proceeds from the issuance of common stock pursuant to
the employee stock purchase plan. Net cash used in financing activities in the
first six months of 2008 was primarily due to the repurchase of common stock of
$175,000, and payments made on our capital lease of $19,000, partially offset by
proceeds of $19,000 received from the issuance of common stock pursuant to the
employee stock purchase plan.

As of
June 30, 2009, we had a loan agreement with a bank under which we may borrow, on
a revolving basis, up to $2.0 million. The interest rate applicable to any
outstanding amounts is determined by reference to LIBOR plus a stated margin,
and is subject to daily adjustment. In connection with entering into the
agreement, we granted the bank a security interest in all of our existing and
after-acquired property, including, but not limited to, intellectual property,
inventory and equipment. Under the agreement, we must comply with certain
operating and reporting covenants as a condition to receiving credit extensions.
If we fail to perform any of our obligations, violate any of our covenants,
suffer a material adverse change in our business or financial condition or
become insolvent under the agreement, the bank can declare any outstanding
amounts immediately due and payable and cease advancing us money or extending us
credit. The agreement expires on February 24, 2010. We are currently in
compliance with all the operating and reporting covenants under the agreement
and there are currently no borrowings outstanding.

We intend
to continue to invest in the development of new products and enhancements to our
existing products. Our future liquidity and capital requirements will depend
upon numerous factors, including the costs and timing of product development
efforts and the success of these development efforts, the costs and timing of
sales and marketing activities, the extent to which our existing and new
products gain market acceptance, competing technological and market
developments, the costs involved in maintaining and enforcing patent claims and
other intellectual property rights, the level and timing of license and service
revenues, available borrowings under line of credit arrangements and other
factors. In addition, we may utilize cash resources to fund acquisitions of, or
investments in, complementary businesses, technologies or product lines. From
time to time, we may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can be
no assurance that such funding, if needed, will be available on terms attractive
to us, or at all. Furthermore, any additional equity financing may be dilutive
to stockholders, and debt financing, if available, may involve restrictive
covenants. Strategic arrangements, if necessary to raise additional funds, may
require us to relinquish our rights to certain of our technologies or products.
Our failure to raise capital when needed could have a material adverse effect on
our business, operating results and financial condition.

We expect
to finance our future commitments using existing cash resources. We currently
anticipate that our available cash resources would be sufficient to meet our
anticipated operating and capital requirements for at least the remainder of
fiscal 2009.

Contractual Obligations and Other
Commercial Commitments

At June
30, 2009, our contractual obligations and commercial commitments have been
summarized below (in thousands):

Operating

Purchase

Year ending December 31,

Leases

Capital
Lease

Obligations

Total

2009

383

24

163

570

2010

305

66

650

1,021

2011

70

-

650

720

$

758

$

90

$

1,463

$

2,311

19

Off-balance Sheet
Arrangements

The
Companys off-balance sheet arrangements consist solely of operating leases and
purchase commitments as described above.

20

ITEM 3: QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK

Foreign Currency
Fluctuations

In the
normal course of business, we are exposed to market risk from the effect of
foreign exchange rate fluctuations on the U.S. dollar value from our foreign
operations. A significant portion of our revenues has been denominated in U.S.
dollars. The operating expenses incurred by our foreign subsidiaries are
denominated in local currencies. Accordingly, we are subject to exposure from
movements in foreign currency exchange rates. To date, the effect of changes in
foreign currency exchange rates on our financial position and operating results
has not been material. We currently do not use financial instruments to hedge
foreign currency risks. We intend to assess the use of financial instruments to
hedge currency exposures on an ongoing basis.

ITEM 4T: CONTROLS AND
PROCEDURES

(a)Evaluation of disclosure controls
and procedures.We maintain disclosure
controls and procedures, as such term is defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934 (the Exchange Act), that are designed to
ensure that information required to be disclosed by us in reports that we file
or submit under the Exchange Act is recorded, processed, summarized, and
reported within the time periods specified in Securities and Exchange Commission
rules and forms, and that such information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
management recognized that disclosure controls and procedures, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the disclosure controls and procedures are met.
Our disclosure controls and procedures have been designed to meet reasonable
assurance standards. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.

Based on
their evaluation as of the end of the period covered by this Quarterly Report on
Form 10-Q, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of such date, our disclosure controls and procedures were
effective at the reasonable assurance level.

(b)Changes in internal
controls.There was no change in our internal
control over financial reporting (as defined in Rule 13a-15(f) under the
Exchange Act) identified in connection with the evaluation described in Item
4T(a) above that occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.

21

PART II  OTHER
INFORMATION

ITEM 1A: RISK FACTORS

You
should carefully consider the following risk factors and the other information
included in this Quarterly Report on Form 10-Q before investing in our common
stock. Our business and results of operations could be seriously impaired by any
of the following risks. The trading price of our common stock could decline due
to any of these risks and investors could lose part or all of their investment.
In addition, if our proposed merger, hereinafter referred to as the
merger, with Mentor Graphics is completed, the combined company will face
additional risks. For information about these risks, refer to the Form S-4
registration statement and amendments thereto, filed with the SEC by Mentor
Graphics (SEC File No. 333-159631) (the Form S-4), including the disclosures
under the heading Risk Factors. Listed below are risk factors specific to
LogicVision.

Risks Related to the
Merger

LogicVision stockholders will
receive a fixed number of shares of Mentor Graphics common stock despite changes
in the market value of Mentor Graphics common stock or LogicVision common
stock.

Upon
completion of the merger, each share of LogicVision common stock will be
converted into 0.2006 shares of Mentor Graphics common stock. The market price
of both Mentor Graphics and LogicVision common stock will fluctuate after the
date of the proxy statement/prospectus. Fluctuations in the market price of
Mentor Graphics and LogicVision common stock may be the result of general market
and economic conditions, changes in the business, operations or prospects of
Mentor Graphics or LogicVision, market assessments of the likelihood that the
merger will be completed and the timing of closing of the merger and other
factors independent of the merger. There will be no adjustment to the
consideration payable to LogicVision stockholders in connection with the merger
for changes in the market price of Mentor Graphics common stock or LogicVision
common stock. In addition, neither Mentor Graphics nor LogicVision may terminate
the merger agreement solely because of changes in the market price of the other
companys common stock. Accordingly, the dollar value of Mentor Graphics common
stock that LogicVision stockholders will receive in the merger may be different
from the dollar value of Mentor Graphics common stock on the date that
LogicVision stockholders adopt the merger agreement and approve the merger. The
historical share prices of both LogicVision common stock and Mentor Graphics
common stock have experienced significant volatility. Mentor Graphics cannot
predict or give any assurances as to the market price of Mentor Graphics common
stock at any time before or after the completion of the merger.

If Mentor Graphics is not successful
in integrating LogicVision into its own business, then the benefits of the
merger will not be fully realized.

Mentor
Graphics may not achieve successful integration of the LogicVision assets in a
timely manner, or at all, and Mentor Graphics may not realize the benefits and
synergies of the merger to the extent, or in the timeframe, anticipated. The
challenges to the successful integration of LogicVision into Mentor Graphics
include:

developing new products and services that optimize the assets
and resources of both companies;

integrating the strategies and operations of the two
companies;

retaining and assimilating the key personnel of LogicVision;
and

retaining and maintaining relationships with existing
customers, distributors and other partners of LogicVision.

Meeting
these challenges will involve considerable risks, such as:

the potential disruption of each companys ongoing business
and distraction of their respective management teams;

unanticipated expenses related to integration, including
technical and operational integration; and

the impairment of relationships with employees, customers and
channel partners as a result of the integration process or the
merger.

22

A failure
by Mentor Graphics to successfully integrate the operation of LogicVision or
otherwise to realize any of the anticipated benefits of the merger could cause
an interruption of, or a loss of momentum in, the activities of the combined
company and could adversely affect Mentor Graphics financial position and
results of operations.

If the merger is not completed,
Mentor Graphics and LogicVisions stock prices and future businesses and
operations could be harmed.

Mentor
Graphics and LogicVisions obligations to complete the merger are subject to
conditions, many of which are beyond the control of Mentor Graphics and
LogicVision. If the merger is not completed for any reason, each company may be
subject to a number of material risks, including the following:

LogicVision may be required under certain circumstances to
pay Mentor Graphics a termination fee equal to $538,193 plus reimbursement of
Mentor Graphics reasonable expenses up to $403,645;

the price of Mentor Graphics common stock and LogicVision
common stock may decline;

Mentor Graphics and LogicVision may be subject to litigation
related to any failure to complete the merger, which could require substantial
time and resources to resolve;

costs related to the merger, such as financial advisory,
legal, accounting and printing fees, must be paid even if the merger is not
completed;

matters relating to the merger (including integration
planning) require substantial commitments of time and resources by Mentor
Graphics and LogicVision management, which could otherwise have been devoted
to other opportunities that may have been beneficial to Mentor Graphics and
LogicVision; and

if the merger is not completed, Mentor Graphics and
LogicVision would fail to derive the benefits expected to result from the
merger.

In
addition, if the merger is terminated, LogicVision may be unable to find a
partner willing to engage in a similar transaction on terms as favorable as
those set forth in the merger agreement, or at all.

The
merger will occur only if stated conditions are met, including, among others,
the adoption of the merger agreement and approval of the merger by LogicVisions
stockholders. Many of the conditions are outside the control of Mentor Graphics
and LogicVision, and both parties also have rights to terminate the merger
agreement under specified circumstances. Accordingly, there may be uncertainty
regarding the completion of the merger. This uncertainty may cause customers,
suppliers and channel partners to delay or defer decisions concerning certain
Mentor Graphics or LogicVision products, which could negatively affect their
respective businesses. Customers, suppliers and channel partners may also seek
to change existing agreements with Mentor Graphics or LogicVision as a result of
the merger. Any delay or deferral of those decisions or changes in existing
agreements could materially impact the respective businesses of Mentor Graphics
and/or LogicVision, regardless of whether the merger is ultimately completed.
Moreover, diversion of management focus and resources from the day-to-day
operation of the business to matters relating to the merger could materially
impact each companys business, regardless of whether the merger is completed.
Current and prospective employees of LogicVision may experience uncertainty
about their future roles with the combined company. This may adversely affect
LogicVisions ability to attract and retain applicable key management, sales,
marketing, operations and technical personnel.

23

LogicVision officers and directors
have conflicts of interest that may influence them to support or approve the
merger.

The
directors and officers of LogicVision have interests in the merger that are
different from, or in addition to, those of LogicVision stockholders. The
directors and officers of LogicVision could be more likely to recommend and
approve the merger agreement than if they did not hold these interests.
LogicVision stockholders should consider whether these interests might have
influenced these directors and officers to support or recommend the merger. The
members of the LogicVisions board of directors were aware of and considered
these interests, among other matters, in evaluating and negotiating the merger
agreement and the merger, and in recommending to LogicVisions stockholders that
the merger agreement be adopted. See the section titled Proposal OneThe
MergerInterests of Certain Persons in the Merger in the Form
S-4.

The termination fee and restrictions
on solicitation contained in the merger agreement may discourage other companies
from trying to acquire LogicVision.

Until the
completion of the merger, with limited exceptions, the merger agreement
prohibits LogicVision from entering into an alternative acquisition transaction
with, or soliciting any alternative acquisition proposal from, another party.
LogicVision has agreed under certain circumstances to pay Mentor Graphics a
termination fee equal to $538,193 plus reimbursement of Mentor Graphics
reasonable expenses up to $403,645, including where LogicVisions board of
directors withdraws its support of the merger to enter into a business
combination with a third party. These provisions could discourage other
companies from trying to acquire LogicVision even though those other companies
might be willing to offer greater value to LogicVision stockholders than Mentor
Graphics has offered in the merger.

LogicVision stockholders, as a
group, will have reduced ownership and voting interests after the merger. In
addition, the rights of holders of LogicVision common stock will change as a
result of the merger.

After the
merger, former LogicVision stockholders will hold approximately 2% of the
outstanding shares of Mentor Graphics common stock. Consequently, as a general
matter, LogicVision stockholders, as a group, will have reduced ownership and
voting interests in Mentor Graphics following the merger than they had in
LogicVision prior to the merger and, as a result, they will have less influence
over the management and policies of Mentor Graphics than they currently exercise
over the management and policies of LogicVision.

In
addition, after the merger, the rights of those stockholders of LogicVision who
will become stockholders of Mentor Graphics will be governed by Mentor Graphics
amended and restated articles of incorporation and by-laws, which are different
from LogicVisions amended and restated certificate of incorporation and
by-laws. For more information, see the section titled Comparison of Rights of
Holders of Mentor Graphics Common Stock and LogicVision Common Stock
in the Form S-4.

Mentor Graphics will incur
additional integration expenses in connection with the merger.

In the
event the merger is completed, Mentor Graphics expects to incur additional
expenses in connection with the integration of LogicVision, including
integrating personnel, information technology systems, accounting systems,
vendors and strategic partners of each company and implementing consistent
standards, policies, and procedures.

24

Risks Related to
LogicVision

If the semiconductor industry does
not adopt embedded test technology on a widespread basis, our revenues could
decline and our stock price could fall.

To date,
the semiconductor industry has not adopted embedded test technology as an
alternative to current testing methods on a widespread basis. If the
semiconductor industry does not adopt embedded test technology widely and in the
near future, our growth will be limited, our revenues could decline, and our
stock price could fall. We cannot provide assurance that integrated circuit
designers and design companies customers will accept embedded test technology
as an alternative to current testing methods in the time frame we anticipate, or
at all. The industry may fail to adopt embedded test technology for many
reasons, including the following:

our current and potential customers may not accept
or embrace our Dragonfly Test PlatformTMintegratedfamily of products;

potential customers may determine that existing
solutions adequately address their testing needs, or theindustry may develop alternative technologies to address
their testing needs;

potential customers may not be willing to accept
the perceived delays in the early design stages associatedwith implementing embedded test technology in order to
achieve potential time and cost savings at laterstages of silicon debugging and production testing;

potential customers may have concerns over the
reliability of embedded testing methods relative toexisting test methods;

our existing and potential customers may react to
declines in demand for semiconductors by curtailing ordelaying new initiatives for new complex semiconductors or by extending
the approval process for newprojects, thereby
lengthening our sales cycles; and

designers may be reluctant to take on the added
responsibility of incorporating embedded test technologyas part of their design process, or to learn how to
implement embedded test technology.

The current economic downturn and
uncertainty in the global economy and effects on the industries into which we
sell our products impacted our customers research and development budgets, and
harmed our business and operating results.

The
worldwide economy is currently undergoing significant turmoil, which together
with uncertainty about future economic conditions, has negatively impacted our
customers, and can cause our customers to postpone their decision making and
decrease their spending. Our sales are dependent upon capital spending trends
and new design projects, and a substantial portion of our costs are fixed in the
near term. The demand from our customers is uncertain and difficult to predict.
Slower growth in the semiconductor and systems markets such as postponed or
canceled capital expenditures for previously planned expansions or new
fabrication facility construction projects, a reduced number of design starts,
reduction of design and test budgets or continued consolidation among our
customers would harm our business and financial condition.

The
primary customers for semiconductors that incorporate our embedded test
technology are companies in the automotive, consumer, communications, medical
products, networking and server products industries. The current economic
downturn and a downturn in these particular markets or in general economic
conditions could result in the cutback of research and development budgets or
capital expenditures, which would likely result in a reduction in demand for our
products and services and could harm our business. If the economy continues to
experience economic, political or social turmoil, existing and prospective
customers may further reduce their design budgets or delay implementation of our
products, which could harm our business and operating results.

We are subject to the cyclical
nature of the semiconductor and electronics industries, and any downturn in
these industries could harm our business, operating results, and financial
condition.

In
addition to the effects of macroeconomic factors, the markets for semiconductor
products are cyclical. In recent years, most countries have experienced
significant economic difficulties. These difficulties triggered a significant
downturn in the semiconductor market, resulting in reduced budgets for chip
design tools. In addition, the electronics industry has historically been
subject to seasonal and cyclical fluctuations in demand for its products, and
this trend may continue in the future. These industry downturns have been, and
may continue to be, characterized by diminished product demand, excess
manufacturing capacity and subsequent erosion of average selling prices. As a
result, our future operating results may reflect substantial fluctuations from
period to period as a consequence of these industry patterns, general economic
conditions affecting the timing of orders from customers and other factors. Any
negative factors affecting the semiconductor industry, including the downturns
described here, could significantly harm our business, financial condition and
results of operations.

25

We have a history of losses and an
accumulated deficit of approximately $103.7 million as of June 30, 2009. If we
do not generate sufficient net revenue in the future to achieve or sustain
profitability, our stock price could decline.

We have
incurred significant net losses since our inception, including losses of $3.5
million, $3.7 million and $7.1 million for the years ended December 31, 2008,
2007 and 2006, respectively. At June 30, 2009, we had an accumulated deficit of
approximately $103.7 million. We expect our future revenues to be impacted by
our long sales cycle and our revenue recognition policies, and we expect to
continue to invest in our research and development projects as well as service
operations required to support our business development activities. These
product and business development expenditures as well as other operating
expenses could continue to exceed our revenues, thus preventing us from
achieving and maintaining profitability. To achieve and maintain profitability,
we will need to generate and sustain substantially higher revenues while
maintaining reasonable cost and expense levels. If we fail to achieve
profitability within the time frame expected by securities analysts or investors
and our cash balances continue to decline, the market price of our common stock
will likely decline. We may not achieve profitability if our revenues do not
increase or if they increase more slowly than we expect. In addition, our
operating expenses are largely fixed, and any shortfall in anticipated revenues
in any given period could harm our operating results.

The sales and implementation cycles
for our products are typically long and unpredictable, taking from three months
to one year or longer for sales and an additional one to six months for
implementation. As a result, we may have difficulty predicting future revenues
and our revenues and operating results may fluctuate significantly, which could
cause our stock price to fluctuate.

Our sales
cycle has ranged from three months to one year or longer and our customers
implementation cycle has been approximately an additional one to six months. We
believe that convincing a potential customer to integrate our technology into an
integrated circuit at the design stage, which we refer to as a design win, is
critical to retaining existing customers and to obtaining new customers.
However, acceptance of our embedded test technology generally involves a
significant commitment of resources by prospective customers and a fundamental
change in their method of designing and testing integrated circuits. Many of our
potential customers are large enterprises that generally do not adopt new design
methodologies quickly. Also, we may have limited access to the key
decision-makers of potential customers who can authorize the adoption of our
technology. As a result, the period between our initial contact with a potential
customer and the sale of our products to that customer, if any, is often lengthy
and may include delays associated with our customers budgeting and approval
processes, as well as a substantial investment of our time and resources. We
have incurred high customer engagement and support costs, including sales
commissions, and the failure to manage these costs could harm our operating
results.

If we
fail to achieve a design win with a potential customer early in a given product
cycle, it is unlikely that the potential customer will become a customer before
its next product cycle, if at all. Because of the length of our sales cycle, our
failure to achieve design wins could have a material and prolonged adverse
effect on our sales and revenue growth. Our revenue streams may fluctuate
significantly due to the length of our sales cycle, which may make our future
revenues difficult to project and may cause our stock price to
fluctuate.

If a customer cancels its order or
defaults on payment or if we renegotiate an existing order, we may be unable to
recognize revenue from backlog, which could have a material adverse effect on
our financial condition and results of operations.

A
significant portion of the orders in our backlog provides customers with
cancellation rights or is recognized as revenue when payment is due. In
addition, some orders extend over periods ranging up to thirty-six months. If a
customer cancels its order or delays its contractual payments we may not be able
to realize revenue from backlog in the time frame expected or at all. Also, it
is possible that customers from whom we expect to derive revenue from backlog
will default, and as a result we may not be able to recognize expected revenue
from backlog. If a customer defaults or fails to pay amounts owed, or if the
level of defaults increases, our bad debt expense is likely to increase.
Additionally, our customers may seek to renegotiate pre-existing contractual
commitments. If the current economic downturn is prolonged, our customers
financial condition and, in turn, their ability or willingness to fulfill their
contractual obligations to us could be adversely affected. Any material payment
default by our customers would harm our financial condition and results of
operations.

26

Fluctuations in our revenues and
operating results could cause the market price of our common stock to
decline.

Our
revenues and operating results have fluctuated from quarter to quarter in the
past and may do so in the future, which could cause the market price of our
common stock to decline. Accordingly, quarter-to-quarter comparisons of our
results of operations may not be an indication of our future performance. In
future periods, our revenues and results of operations may be below the
estimates of public market analysts and investors. This discrepancy could cause
the market price of our common stock to decline.

Fluctuations in our revenues and
operating results may be caused by:

timing, terms and conditions of customer
agreements;

customers placing orders at the end of the
quarter;

the mix of our license and service
revenues;

timing of customer usage of our technology in
their product designs and the recognition of revenuestherefrom when amounts are due based on design usage;

timing of sales commission expenses and the
recognition of license revenues from related customeragreements;

changes in our and our customers development
schedules and levels of expenditures on research anddevelopment;

industry patterns and changes or cyclical and
seasonal fluctuations in the markets we target;

timing and acceptance of new technologies, product
releases or enhancements by us, our competitors orour customers;

timing and completion of milestones under customer
agreements; and

market and general economic
conditions.

Delays or
deferrals in purchasing decisions by our customers may increase as we develop
new or enhanced products. Our current dependence on a small number of customers
increases the revenue impact of each customers actions relative to these
factors. Our expense levels are based, in large part, on our expectations
regarding future revenues, and as a result net income (loss) for any quarterly
period in which material customer agreements are delayed could vary
significantly from our budget projections.

The
accounting rules we are required to follow require us to recognize revenues only
when certain criteria are met. As a result, for a given quarter it is possible
for us to fall short in our revenues and/or earnings estimates even though total
orders are according to our plan or, conversely, to meet our revenues and/or
earnings estimates even though total orders fall short of our plan, due to
revenues resulting from the recognition of previously deferred revenues. Orders
for software support and consulting services yield revenues over multiple
quarters, rather than at the time of sale. The specific terms agreed to with a
customer and/or any changes to the rules interpreting such terms may have the
effect of requiring deferral of product revenues in whole or in part or,
alternatively, of requiring us to accelerate the recognition of such revenues
for products to be used over multiple years.

27

Intense competition in the
semiconductor and systems industries, particularly in the design and test of
semiconductors, could prevent us from increasing or sustaining our revenues and
prevent us from achieving or sustaining profitability.

The
semiconductor and systems industries are extremely competitive and characterized
by rapidly changing technology. The market for embedded test solutions is still
evolving, and we expect competition to become more intense in the future. Our
current principal competitors in the design phase of product development
include:

integrated device manufacturers, such as
International Business Machines Corporation, that use their owntest solutions in chips manufactured for and sold to
others.

Our
embedded test technology also has the potential to impact the automated test
equipment market, which may place us in competition with traditional hardware
tester manufacturers such as Advantest Corporation, LTX-Credence Corporation,
Teradyne, Inc. and Verigy Ltd. As embedded test becomes adopted more widely in
the market, any of these automated test equipment companies, or others, may
offer their own embedded test solutions. Most of our competitors in electronic
design automation and external test equipment businesses are significantly
larger than we are and have greater financial resources, greater name
recognition and longer operating histories than we have. Some of our competitors
offer a more comprehensive range of products covering the entire design flow and
complete external test flow, and they may be able to respond more quickly or
adjust prices more effectively to take advantage of new opportunities or
customer requirements. In addition, all of the tester manufacturers listed above
participate in our LVReady partner program through which our embedded test
access software is integrated into their test platform, which may provide them
with additional insight into our business and technology. Increased competition
in the semiconductor industry could result in pricing pressures, reduced sales,
reduced margins or failure to achieve or maintain widespread market acceptance,
any of which could prevent us from increasing or sustaining our revenues and
achieving or sustaining profitability.

Our target markets are comprised of
a limited number of customers. If we fail to obtain or retain customer
relationships, our revenues could decline.

We derive
a significant portion of our revenues from a relatively small number of
customers. Three customers accounted for approximately 26%, 16% and 15%,
respectively, of revenues for the six months ended June 30, 2009. Three
customers accounted for approximately 18%, 16% and 16%, respectively, of total
revenues in the year ended December 31, 2008; these customers accounted for
approximately 21%, 19% and 11%, respectively, of total revenues in the year
ended December 31, 2007, and 26%, 18% and 8%, respectively, of total revenues
for the year ended December 31, 2006. We anticipate that we will continue to
rely on a limited number of customers for a substantial portion of our future
revenues and we must obtain additional large orders from customers on an ongoing
basis to increase our revenues and grow our business. In addition, the loss of
any significant or well-known customer could harm our operating results or our
reputation. In particular, a loss of a significant customer could cause
fluctuations in our results of operations because our expenses are fixed in the
short term, it takes us a long time to replace customers and, because of
required methods of revenue recognition, any offsetting license revenues may
need to be recognized over a period of time.

We have relied and expect to
continue to rely on our ETCreate products for a significant portion of our
revenues.

Revenues
from sales of our ETCreate products and related maintenance and training
services accounted for 76% of our total revenues for the six months ended June
30, 2009, and 79%, 87% and 79% of our total revenues for the years ended
December 31, 2008, 2007 and 2006, respectively. We currently expect that
revenues from our ETCreate products will continue to account for a substantial
percentage of our revenues in the foreseeable future and thereafter. Our future
operating results are significantly dependent upon the continued market
acceptance of our products. Our business will be harmed if our products do not
continue to achieve market acceptance or if we fail to develop and market
improvements to our products or enhancements thereof. A decline in demand for
our ETCreate products as a result of competition, technological change or other
factors could harm our business.

28

Our products incorporate technology
licensed from third parties. If any of these licenses are terminated, our
ability to develop and license our products could be delayed or
reduced.

We use
technology, including software, which we license from third parties. If we do
not maintain our existing third party technology licenses or enter into licenses
for alternative technologies, we could be required to cease or delay product
shipments while we seek to develop alternative technologies.

We depend on third parties to
provide electronic design automation software that is compatible with our
solution. If these third parties do not continue to provide compatible design
products, we would need to develop alternatives, which could delay product
introductions and cause our revenues and operating results to
decline.

Our
customers depend on electronic design automation software to design their
products using our solution. We depend on the same software to develop our
products. Although we have established relationships with a variety of
electronic design automation vendors to gain access to this software and to
assure compatibility, these relationships may be terminated with limited notice.
If any of these relationships were terminated and we were unable to obtain
alternative software in a timely manner, our customers could be unable to use
our solution. In addition, we could experience a significant increase in
development costs, our development process could take longer, product
introductions could be delayed and our revenues and operating results could
decline.

If automated test equipment
companies are unwilling to work with us to make our technology compatible with
theirs, we may need to pursue alternatives, which could increase the time it
takes us to bring our solution to market and decrease customer acceptance of our
technology.

Although
we are presently working with a number of automated test equipment companies to
achieve optimal compatibility of our technologies, these companies may elect not
to work with us in the future. If automated test equipment companies are
unwilling to incorporate modifications into their equipment and operating
systems to allow them to work with our technology, we may need to seek
alternatives. These alternatives might not provide optimal levels of test
function, and pursuing these alternatives could increase the time and expense it
takes us to bring our technology to market, either of which could decrease
customer acceptance of our technology and cause our revenues and margins to
decline.

Our future success will depend on
our ability to keep pace with rapid technological advancements in the
semiconductor industry. If we fail to develop and introduce new products and
enhancements on a timely basis, our ability to attract and retain customers
could be impaired, which would cause our operating results to
decline.

The
semiconductor industry is characterized by rapidly changing technology, evolving
industry standards, rapid changes in customer requirements, frequent product
introductions and ongoing demands for greater speed and functionality. We must
continually design, develop and introduce new products with improved features to
be competitive. Our products may not achieve market acceptance or adequately
address the changing needs of the marketplace, and we may not be successful in
developing and marketing new products or enhancements to our existing products
on a timely basis. The introduction of products embodying new technologies, the
emergence of new industry standards or changes in customer requirements could
render our existing products obsolete and unmarketable. We may not have the
financial resources necessary to fund future innovations. If we are unable, for
technical, legal, financial or other reasons, to respond in a timely manner to
changing market conditions or customer requirements, our business and operating
results could be seriously harmed.

A change
in accounting policies can have a significant effect on our reported results and
may even affect our reporting of transactions completed before a change is
announced. In particular, new pronouncements and varying interpretations of
pronouncements on software revenue recognition and stock-based compensation have
occurred with frequency, may occur in the future and could impact our revenues,
expenses and results of operations. Required changes in our methods of revenue
recognition could result in deferral of revenues recognized in current periods
to subsequent periods or accelerated recognition of deferred revenues to current
periods, each of which could cause shortfalls in meeting the expectations of
investors and securities analysts. Our stock price could decline as a result of
any shortfall.

29

For
example, the adoption of SFAS 123(R), Share-Based Payment, which requires
compensation costs relating to share-based payment transactions to be recognized
in financial statements beginning in January 2006, had a negative impact on our
results of operations and loss per share.

Accounting policies affecting many other aspects of our business,
including rules relating to revenue recognition and purchase accounting for
business combinations have recently been revised or are under review. Changes to
those rules or the questioning of current practices may adversely affect our
reported financial results or the way we conduct our business.

We are exposed to risks from
legislation requiring companies to evaluate their internal control over
financial reporting.

Section
404 of the Sarbanes-Oxley Act of 2002 requires our management to report on the
effectiveness of our internal control over financial reporting. Our independent
registered public accounting firm will be required to attest to the
effectiveness of our internal control over financial reporting beginning as
early as fiscal 2009. We have an ongoing program to perform the system and
process evaluation and testing necessary to comply with these requirements. We
expect to incur increased expense and to devote additional management resources
to Section 404 compliance. In the event our chief executive officer, chief
financial officer or independent registered public accounting firm determine
that our internal control over financial reporting is not effective as defined
under Section 404, investor perceptions of our company may be adversely affected
and could cause a decline in the market price of our stock.

Compliance with changing regulation
of corporate governance and public disclosure may result in additional
costs.

Changes
in the laws and regulations affecting public companies, including the provisions
of the Sarbanes-Oxley Act of 2002 and recent SEC and Nasdaq rules and
regulations, are creating new duties and requirements for us and our executives,
directors, attorneys and our independent registered public accounting firm. In
order to comply with these rules, we will have to incur additional costs for
personnel and use additional outside legal, accounting and advisory services,
which will increase our operating expenses. Management time associated with
these compliance efforts necessarily reduces time available for other operating
activities, which could adversely affect operating results. To date, our costs
to comply with these rules have not been significant; however, we cannot predict
or estimate the amount of future additional costs we may incur or the timing of
such costs.

Our products may have errors or
defects that users identify after deployment, which could harm our reputation
and our business.

Our
products may contain undetected errors when first introduced or when new
versions or enhancements are released. We have from time to time found errors in
versions of our products, and we may find errors in our products in the future.
The occurrence of errors could cause sales of our products to decline, divert
the attention of management and engineering personnel from our product
development efforts and cause significant customer relations problems. Customer
relations problems could damage our reputation, hinder market acceptance of our
products and result in loss of future revenues.

We must continually attract and
retain engineering personnel, or we will be unable to execute our business
strategy.

Our
strategy for encouraging the adoption of our technology requires that we employ
highly skilled engineers to develop our products and work with our customers. In
the past, we have experienced difficulty in hiring and retaining highly skilled
engineers with appropriate qualifications to support our business. As a result,
our future success depends in part on our ability to identify, attract, retain
and motivate qualified engineering personnel.

30

Competition for qualified engineers is
intense, especially in the Silicon Valley where our headquarters are located. If
we lose the services of a significant number of our engineers and we cannot hire
and integrate additional engineers, it could disrupt our ability to develop our
products and implement our business strategy.

We may be unable to replace the
technical, sales, marketing and managerial contributions of key
individuals.

We depend
on our senior executives, our research and development personnel and our sales
and marketing personnel, all of whom are critical to our business. We do not
have long-term employment agreements with our key employees nor do we maintain a
key person life insurance policy on any of our key employees. If we lose the
services of any of these key executives, our product development processes and
sales efforts could be slowed. We may also incur increased operating expenses
and be required to divert the attention of other senior executives to search for
their replacements. The integration of any executives or new personnel could
disrupt our ongoing operations.

If we fail to protect our
intellectual property rights, competitors may be able to use our technologies,
which could weaken our competitive position, reduce our revenues or increase our
costs.

Our
success and ability to compete depend largely upon the protection of our
proprietary technology. We rely on a combination of patent, copyright, trademark
and trade secret laws, confidentiality procedures and licensing arrangements to
establish and protect our proprietary rights. Our pending patent applications
may not result in issued patents, and our existing and future patents may not be
sufficiently broad to protect our proprietary technologies. Policing
unauthorized use of our products is difficult and we cannot be certain that the
steps we have taken will prevent the misappropriation or unauthorized use of our
technologies, particularly in foreign countries where the laws may not protect
our proprietary rights as fully as U.S. laws. Any patents we obtain or license
may not be adequate to protect our proprietary rights. Our competitors may
independently develop similar technology, duplicate our products or design
around any patents issued to us or our other intellectual property
rights.

Litigation may be necessary to enforce our intellectual property rights
or to determine the validity or scope of the proprietary rights of others. As a
result of any such litigation, we could lose our proprietary rights and incur
substantial unexpected operating costs. We may need to take legal action to
enforce our proprietary rights in the future. Any action we take to protect our
intellectual property rights could be costly and could absorb significant
management time and attention. In addition, failure to adequately protect our
trademark rights could impair our brand identity and our ability to compete
effectively.

Any dispute involving our patents or
other intellectual property could include our industry partners and customers,
which could trigger our indemnification obligations to them and result in
substantial expense to us.

In any
dispute involving our patents or other intellectual property, our licensees
could also become the target of litigation. This could trigger technical support
and indemnification obligations in some of our license agreements which could
result in substantial expenses. In addition to the time and expense required for
us to support or indemnify our licensees, any such litigation could severely
disrupt or shut down the business of our licensees, which in turn could hurt our
relations with our customers and cause our revenues to decrease.

Failure to obtain export licenses
could harm our business.

We must
comply with U.S. Department of Commerce regulations in shipping our software and
hardware products and other technologies outside the United States. Although we
have not had any significant difficulty complying with these regulations to
date, any significant future difficulty in complying could harm our business,
operating results and financial condition.

We have limited control over
third-party representatives who market, sell and support our products in foreign
markets. Loss of these relationships could decrease our revenues and harm our
business.

We offer
our products and services for sale through distributors and sales
representatives in China, France, Germany, India, Israel, Japan, Korea, the UK
and Sweden. We anticipate that sales in these markets will account for a portion
of our total revenues in future periods. In 2005, we appointed a sales
representative in Israel and distributors in France and the UK. In 2006, we
appointed a sales representative in India. In 2007, we appointed a new
distributor in Japan, augmenting our direct sales organization. In 2008, we
appointed a new distributor in China, and two new sales representatives in
Europe. Our third-party representatives are not obligated to continue selling
our products, and they may terminate their arrangements with limited prior
notice. Growing our relationship with these new distributors and sales
representatives, or establishing alternative distribution channels in these
markets could consume substantial management time and resources, decrease our
revenues and increase our expenses.

31

We face business, political and
economic risks because a portion of our revenues and operations are outside of
the United States.

International revenues accounted for 28% of our total revenues for the
six months ended June 30, 2009, and 30%, 25% and 16% of our total revenues for
the years ended December 31, 2008, 2007 and 2006, respectively. In addition to
our international sales, we have operations in Canada, Japan and the UK. Our
success depends upon continued expansion of our international operations, and we
expect that international revenues will continue to be an important component of
our total future revenues. Our international business involves a number of
risks, including:

political, economic, health or military conditions
associated with worldwide conflicts and events.

As a
result of our direct selling activities in Japan, a portion of our international
revenues is denominated in Japanese yen, which is subject to exposure from
movements in foreign currency exchange rates. In addition, most of our remaining
international revenues are denominated in U.S. dollars, creating a risk that
fluctuation in currency exchange rates will make our prices uncompetitive. To
the extent that profit is generated or losses are incurred in foreign countries,
our effective income tax rate may be significantly affected. Any of these
factors could significantly harm our future international sales and,
consequently, our revenues and overall results of operations and business and
financial condition.

We may be unable to consummate
future potential acquisitions or investments or successfully integrate acquired
businesses or investments or foreign operations with our business, which may
disrupt our business, divert managements attention and slow our ability to
expand the range of our proprietary technologies and products.

We may
expand the range of our proprietary technologies and products, acquire or make
investments in additional complementary businesses, technologies or products, if
appropriate opportunities arise. For example, in 2004, we completed the
acquisition of SiVerion, Inc. We may be unable to identify suitable acquisition
or investment candidates at reasonable prices or on reasonable terms, or
consummate future acquisitions or investments, each of which could slow our
growth strategy. Our acquisition of SiVerion, Inc. and any future acquisitions
may involve risks such as the following:

we may not achieve the anticipated benefits of the
acquisitions;

our acquisition and integration costs may be
higher than we anticipated and may cause our quarterly andannual operating results to fluctuate;

we may be unable to retain key employees, such as
management, technical or sales personnel, of theacquired businesses;

32

we may experience difficulty and expense in
assimilating the operations and personnel of the acquiredbusinesses, which could be further affected by the acquired
businesses not being located near our existingsites;

we may incur amortization or impairment expenses
if an acquisition results in significant goodwill or otherintangible assets;

we may be unable to complete the development and
application of the acquired technology or products orintegrate the technology or products with our own;

we may be exposed to unknown liabilities of
acquired companies;

we may experience difficulties in establishing and
maintaining uniform standards, controls, procedures andpolicies;

our relationships with key customers of acquired
businesses may be impaired, due to changes inmanagement and ownership of the acquired businesses;
or

our stockholders may be diluted if we pay for the
acquisition with equity securities.

Intellectual property litigation,
which is common in our industry, could be costly, harm our reputation, limit our
ability to license or sell our proprietary technologies or products and divert
the attention of management and technical personnel.

The
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights. While we have not received formal notice
of any infringement of the rights of any third party, questions of infringement
in the semiconductor field involve highly technical and subjective analyses.
Litigation may be necessary in the future to enforce any patents we may receive
and other intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity, and we may not prevail in
any future litigation. Any such litigation, whether or not determined in our
favor or settled, could be costly, could harm our reputation and could divert
the efforts and attention of our management and technical personnel from normal
business operations. Adverse determinations in litigation could result in the
loss of our proprietary rights, subject us to significant liabilities, require
us to seek licenses from third parties or prevent us from licensing our
technology or selling our products, any of which could harm our
business.

Our stock price may decline
significantly because of stock market fluctuations that affect the prices of
technology stocks. A decline in our stock price could result in securities class
action litigation against us that could divert managements attention and harm
our business.

The stock
market has experienced significant price and trading volume fluctuations that
have adversely affected the market prices of common stock of technology
companies. These broad market fluctuations may reduce the market price of our
common stock. In the past, securities class action litigation has often been
brought against a company after periods of volatility in the market price of
securities. In the future, we may be a target of similar litigation. Securities
litigation could result in substantial costs and divert our managements
attention and resources, which in turn could harm our ability to execute our
business plan.

33

Our stock may fail to meet the
requirements for continued listing on The Nasdaq Capital Market, in which case
the price and liquidity of our common stock may decline. The reverse stock split
of our common stock may reduce the liquidity of our common stock, and the market
price of our common stock may decline.

We are
subject to the continued listing requirements of The Nasdaq Capital Market,
which include a $1.00 minimum closing bid price requirement. When we transferred
from The Nasdaq Global Market to The Nasdaq Capital Market, we were not in
compliance with this minimum closing bid price requirement. Effective March 12,
2008, we implemented a 1-for-2.5 reverse stock split of our common stock. On
March 31, 2008, we received a notice from The Nasdaq Stock Market stating that,
because the closing bid price of our common stock had been at $1.00 per share or
greater for at least 10 consecutive business days, we had regained compliance.
We cannot assure you, however, that we will be able to continue to maintain
compliance with the minimum bid price requirement. If we fail to maintain
compliance with the minimum bid price requirement and are delisted, our
financial condition could be harmed and our stock price would likely decline.
The reverse stock split reduced the number of shares of our common stock
outstanding, which could adversely affect the liquidity of our common stock,
which could adversely affect the market price of our common stock.

Our ability to raise capital in the
future may be limited and our failure to raise capital when needed could prevent
us from growing.

We
believe that our existing cash resources and available debt financing will be
sufficient to meet our anticipated cash needs for at least the next 12 months.
However, the timing and amount of our working capital and capital expenditure
requirements may vary significantly depending on numerous factors,
including:

the level and timing of license and service
revenues;

the costs and timing of expansion of product
development efforts and the success of these developmentefforts;

the extent to which our existing and new products
gain market acceptance;

the costs and timing of expansion of sales and
marketing activities;

competing technological and marketing
developments;

the extent of international
operations;

the need to adapt to changing technologies and
technical requirements;

the costs involved in maintaining and enforcing
patent claims and other intellectual property rights;

the existence of opportunities for expansion and
for acquisitions of, investments in, complementarybusinesses, technologies or product lines; and

access to and availability of sufficient
management, technical, marketing and financial personnel.

If our
capital resources are insufficient to satisfy our liquidity requirements, we may
seek to sell additional equity securities or debt securities or obtain debt
financing. The sale of additional equity securities or debt securities would
result in additional dilution to our stockholders. Additional debt would result
in increased expenses and could result in covenants that would restrict our
operations. If adequate funds are not available or are not available on
acceptable terms, this would significantly limit our ability to hire, train or
retain employees, support our expansion, take advantage of unanticipated
opportunities such as acquisitions of businesses or technologies, develop or
enhance products, or respond to competitive pressures.

34

ITEM 6: EXHIBITS

2.1

Agreement
and Plan of Merger, dated May 6, 2009, by and among Mentor Graphics
Corporation, Fulcrum Acquisition Corporation and LogicVision, Inc.
(incorporated by reference to the exhibit of the same number to the
Companys Current Report on Form 8-K filed with the Commission on May 7,
2009).

4.1

Amendment to
Rights Agreement, dated May 6, 2009, by and between LogicVision, Inc. and
Mellon Investor Services LLC (incorporated by reference to Exhibit 4.2 to
the Companys Form 8-A/A filed with the Commission on May 7,
2009).

10.1

Amended and
Restated Change of Control and Severance Agreement dated May 6, 2009,
between LogicVision, Inc. and James T. Healy (incorporated by reference to
the exhibit of the same number to the Companys Current Report on Form 8-K
filed with the Commission on May 7, 2009).

10.2

Amended and
Restated Change of Control and Severance Agreement dated May 6, 2009,
between LogicVision, Inc. and Fadi Maamari (incorporated by reference to
the exhibit of the same number to the Companys Current Report on Form 8-K
filed with the Commission on May 7, 2009).

10.3

Amended and
Restated Change of Control and Severance Agreement dated May 6, 2009,
between LogicVision, Inc. and Mei Song (incorporated by reference to the
exhibit of the same number to the Companys Current Report on Form 8-K
filed with the Commission on May 7, 2009).

10.4

Third
Amended and Restated Loan and Security Agreement, dated as of April 24,
2009, by and between Comerica Bank and LogicVision, Inc. (incorporated by
reference to Exhibit 10.9 to the Companys Current Report on Form 8-K
filed with the Commission on April 30, 2009).

* In accordance with Item
601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to
accompany this Form 10-Q and will not be deemed "filed" for purposes of Section
18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act.

35

SIGNATURESPursuant to the requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly authorized.

Dated: July 30, 2009

LOGICVISION, INC.

(Registrant)

By:

/S/ JAMES T. HEALY

James T.
Healy

President, Chief Executive
Officer and Director

(Principal
Executive Officer)

By:

/S/ MEI SONG

Mei
Song

Vice President
of Finance and Chief Financial Officer

(Principal Financial and
Accounting Officer)

36

EXHIBIT INDEX

Exhibit

Number

Description of
Exhibit

2.1

Agreement and Plan of
Merger, dated May 6, 2009, by and among Mentor Graphics Corporation,
Fulcrum Acquisition Corporation and LogicVision, Inc. (incorporated by
reference to the exhibit of the same number to the Companys Current
Report on Form 8-K filed with the Commission on May 7, 2009).

4.1

Amendment to Rights
Agreement, dated May 6, 2009, by and between LogicVision, Inc. and Mellon
Investor Services LLC (incorporated by reference to Exhibit 4.2 to the
Companys Form 8-A/A filed with the Commission on May 7,
2009).

10.1

Amended and Restated
Change of Control and Severance Agreement dated May 6, 2009, between
LogicVision, Inc. and James T. Healy (incorporated by reference to the
exhibit of the same number to the Companys Current Report on Form 8-K
filed with the Commission on May 7, 2009).

10.2

Amended and Restated
Change of Control and Severance Agreement dated May 6, 2009, between
LogicVision, Inc. and Fadi Maamari (incorporated by reference to the
exhibit of the same number to the Companys Current Report on Form 8-K
filed with the Commission on May 7, 2009).

10.3

Amended and Restated
Change of Control and Severance Agreement dated May 6, 2009, between
LogicVision, Inc. and Mei Song (incorporated by reference to the exhibit
of the same number to the Companys Current Report on Form 8-K filed with
the Commission on May 7, 2009).

10.4

Third Amended and
Restated Loan and Security Agreement, dated as of April 24, 2009, by and
between Comerica Bank and LogicVision, Inc. (incorporated by reference to
Exhibit 10.9 to the Companys Current Report on Form 8-K filed with the
Commission on April 30, 2009).

* In accordance with Item
601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the
certifications furnished in Exhibits 32.1 and 32.2 hereto are deemed to
accompany this Form 10-Q and will not be deemed "filed" for purposes of Section
18 of the Exchange Act. Such certifications will not be deemed to be
incorporated by reference into any filing under the Securities Act or the
Exchange Act.